How Trade Credit Insurance adds value to Trade Financing

Trade credit insurance on its own is already a powerful risk management tool that dates back to 1820. Traditionally, trade credit insurance policies simply protects big companies in case their buyers don’t pay them, however, it has grown and evolved a lot over the years. One of the recent developments is how trade credit insurance is getting more involved in trade financing.

How this works is that insurance companies provide protection to lenders who finance to suppliers and traders. For example, when a lender finances a transaction of a coconut trader, the financing is usually secured by the payment of the coconut trader’s buyer. Therefore, when the buyer does not pay the coconut trader, the lender becomes very worried if the coconut trader can pay them back.

This is where trade credit insurance comes in. The role of the insurance company here is that it covers the credit and performance risks related to the buyer. In other words, the insurance company compensates the lender when the buyer fails to pay the borrower, if the loss is valid. Of course, this doesn’t answer all risks related to trade finance, therefore, the remaining risks are absorbed by the lender.

Many major banks (such as Rabobank, HSBC, Standard Chartered) already recognize insurance as a proper risk mitigation tool for trade finance. Thus, when lenders find out that a transaction is secured with trade credit insurance, it gives them more confidence to lend to a business. But don’t just take our word for it, read these testimonies below from lenders in the Philippines about how trade credit insurance complements financing:

Investing in Trade Credit Insurance is critical in minimizing risks which in turn allows us to dramatically increase our loan portfolio and serve more clients.

– President, Alternative financing company in the Philippines

I’d say the main hurdle for financing companies is trust and transparency. [Trade Credit Insurance] definitely increases trust and transparency and allows us financing companies to better assess the credit risk or each potential borrower

– Loan Manager,  A finance & private equity group based in the Philippines

Vesl has been integral in assessing and verifying the credit readiness of small businesses, which made our credit scoring faster, seamless and more accurate. Trade credit insurance gives that added security that these businesses are legit and also protected if anything goes wrong. This gives us lenders peace of mind that the transaction will go without a hitch. \

– Chief Financial Officer, A fintech company in the Philippines

Sources:

Posted in Financing Tagged , , , ,

Trade Financing in a Post COVID World [Vesl Live Panel]

Last week, May 8, Vesl held its very first webinar with an economist, a trade lender, and a credit insurance specialist all in one panel.

Mr Asuncion, the chief economist of Unionbank, talks about the economic impact of COVID 19. and how the economic recovery will be a function of: 1)Vaccine / effective treatment / anti-viral drug versus Covid-19; 2)Public health response measures; and 3)Public sector economic support measures. He also forecasts that until the vaccine, we will have sluggish growth.

Meanwhile, Cliff Entrekin, managing director of Convergence Capital Group, shares his views on banks’ and alternative lenders’ state of financing in this pandemic. He also shares how businesses in emerging Asia can cope even without the help of government by using trade finance tools such as trade credit insurance.

Lastly, Raffy Rios, Founder of Synergy Capital Solutions, a veteran in the credit insurance world, talks about how post COVID insurance capacity may look like, with insurers’ “flight to quality”. He noted that we may see more insolvencies later in 2020 and in 2021 as suppliers will only receive notices of nonpayment from buyers later. Due to this, there is greater demand in trade credit insurance post COVID.

A lively Q&A followed the panel discussion.

What industries are generally avoided by trade financiers and bankers now?

Which ones are still welcomed?

What advice can you give businesses to come out financially strong after this crisis? 

Posted in Carlo Asuncion, Cliff Entrekin, Financing, Raffy Rios, Risk Management Tagged , , , , , , ,

4 quick signs that your customer is headed for financial trouble

In the supply chain industry, a responsible business manager must have a heightened sense of awareness on their customer’s financial standing. It is easy to get caught up in fulfilling orders and closing new customers, but making sure you get paid by customers should still be a priority.

There are many ways to find out whether your buyer is headed for financial difficulty. However, some signs are harder to see than others. These are quick and glaring signs that you may encounter at any day, and you should not ignore.


1. Suddenly asking for extension in due date

Sad to say, but paying past due is almost normal in the B2B industry, but if they are asking for more than one month extension for their payments, it’s a red flag. This usually means they’re having troubles with their cash flow. The first thing they will negotiate is payment terms with their suppliers and providers.

2. Negotiating for discounts

Similar to the first item, a customer headed for financial difficulty if they start asking for discounts on their payable items. This is a bigger red flag if you have already been doing business with this customer for a long time, and suddenly they are asking for discounts for shallow reasons.

3. Hard to reach or contact

Another obvious sign is when you are following up with your customers on their due payments and all your calls are going direct to voice mail, your emails are not getting responses, and messages are left on read. Even more alarming is when you visit their office in person, and they seem to avoid seeing you!

4. Major shifts in the industry

If you customer is under an industry going through a major shift, you may need to keep a closer look. These major shifts can be caused by many things such as: government regulations, new advances in technology, and economic crisis.

Example:

  • Regulations: Strict government regulations in the mining industry have caused many companies to stop operations entirely.
  • New technology: When online selling became a cheaper alternative for consumers, retail companies that rely on physical stores can have major problems.
  • Economic crisis: The COVID-19 pandemic caused an economic downturn, affecting all industries.

If you encounter any of these situations with your customer, you shouldn’t immediately panic. There are many reasons why they pay late or cannot be reached, and some of these reasons may be valid and don’t necessarily mean they are headed to financial trouble.

The best way to know is still to look under the hood. Get a copy of their latest financial statement and analyze the figures yourself.

Another option: leave it to the professionals. Trade credit insurance underwriters are experts at looking at financial standing of companies. Their assessment can help you in knowing your customers better. Plus, your receivables are covered in case your customer fails to pay*.

Don’t know where to find trade credit insurance? Creating an account with Vesl can give you access to top insurers of trade credit.

*terms of the insurance policy applies

Posted in Risk Management Tagged , , , , ,

COVID-19 and Its Unsung Domino Effect to SMEs

by Maureen Ledesma

We have been listening to news and social media sentiments about the problems this new coronavirus has brought our lives. The supply chain has definitely not been spared. Although the headlines we may see are those of publicly listed companies in a stock market bloodbath and laying off employees etc, the domino effect to SMEs have been unsung and the effects are quite alarming and we may only be in the early stages. 

In our info graphic below, we take a closer look at the Airlines industry whose stocks tumbled the worst as the corona virus spreads. China Airlines posted record breaking losses of USD3B incurred for a single month in February 2020. Locally, our Philippine Airlines (PSE:PAL) stocks dropped to P5.00 per share, its lowest since 2006. United Airlines warns of worker layoffs without government bailout.   

How about the supply chain? What do we hear about them? Is ABC Plane Food Inc, or XYZ Airplane Fuel Inc still receiving purchase orders from China Airlines, Philippine airlines, United Airlines, etc given that a big number of flights and routes have been cancelled?

SMEs not only see less purchase orders from their biggest clients. 

– Worse, they are eventually made ‘creditors of last resort’. What do we mean by that? It is when large customers (like the airlines for example) become momentarily insolvent and ASK FOR DELAYED PAYMENTS. As an SME with zero negotiating power against these large clients, there’s nothing they can do. Unlike the airlines, SMEs don’t get bailed out by governments. And often, SMEs cannot dictate to get paid right away even when their customers are bailed out of insolvency. 

What other supply chains and industries do you think are hit badly by the new corona virus and the resulting government lock downs? Keen to hear your thoughts. 

Posted in Risk Management Tagged , , , , , , , , , , , ,

3 Insurance Products We Need to Know as the Corona Virus Spreads

by Maureen Ledesma

The corona virus has put a strain in the global economy in the past 2 months. Offices have postponed meetings and events, governments have considered lock downs, tissue paper is running out!.

But what does this mean for you?

If you’re in the tissue paper and disinfectant industry, you are doing more than well. But if you’re in the events, travel and tourism industry, you are also down with the “slow-to-no-business” virus.

Aside from travel insurance that can refund your cancelled flight, what can other types of insurance do (have done) for you?

  •  Events and travel companies should have purchased comprehensive event insurance to refund disgruntled guests. This is to retain customer loyalty and brand reputation.
  • For businesses trading with countries badly hit by the virus, say for example you’re a local producer of plastic supplies for machines in Italy, your #1 concern is if that company in Italy can still pay you on time, or if they can pay at all. In this case, trade credit insurance will be your best friend, to help you confidently continue business with foreign counterparts. If the Italian company can’t pay or went bankrupt, insurers got your back.
  • If you’re a government, you can subscribe to the World Bank’s Pandemic Emergency Financing Facility (insurance linked securities) so it can provide your country or region with the needed liquidity and capital to help you in your response and recovery.

Do you feel bad for learning about these just now? It’s okay. It’s better late than never.  You’ll never know when epidemics like this hit, (And we’re sure this COVID-19 isn’t the last one) so having due protection is important. 

Posted in Risk Management Tagged , , , ,

Letters of Credit versus Trade Credit Insurance

Both Letter of Credit and Trade Credit Insurance are tools used by exporters to lessen the risk of selling to foreign buyers. But how are they different? Here is an infographic comparing Letter of Credit and Trade Credit Insurance.

by Jessica Manipon

If you are in the exporting industry, particularly selling goods to other businesses abroad, you might have come across an instrument called “Letter of Credit”. In the Philippines, this is one of the most common ways an exporter secures payment from their foreign buyers.

We have discussed in many ways how trade credit insurance can protect a business’ receivables from non-payment of their buyers, but comparing Letter of Credit (LC) and Trade Credit Insurance (TCI) can be confusing. Here is a visual guide showing the differences of TCI and LC.

Posted in Risk Management Tagged , , , ,

5 Best Habits of Competitive Businesses to Manage Credit

From timely payment due date reminders to trade credit insurance, here are the top five credit management tools for competitive business owners in the Philippines.

by Randolf Santos

An international study of 1,500 business owners revealed that most companies are slowly deviating away from Net 30 payments. Some of them have required one-week payment terms to reduce the chances of default, but one-week payment terms can be too short for some customers and can make you lose the client. Here are five credit management tools that business owners in the Philippines can use and not worry about straining their relationships with clients:

Automate Payment Reminders

An invoice with a three- or four-week payment due date becomes settled within a month, according to the study. An automated system for polite payment reminders should be helpful, but contemplate carefully about the frequency of reminders. You don’t want to appear pushy. Strike a balance by sending a reminder a few days before the payment deadline. Be ready to call the client if the invoice stays unsettled after a week from the due date.

Offer More Payment Options

Multiple channels make it more convenient for clients to settle outstanding invoices, which then require you to offer more payment options. Cash arguably remains the best payment method for business owners. Some of your clients, however, may refuse to carry large amounts of money. You don’t necessarily need to start accepting credit cards, which can affect your profit margin anyway.

An alternative involves opening an account from a bank that has several branches nearby your clients’ offices. You can also include cheque pick-up service, bank transfer and online payment options. Be sure to list all the possible payment methods in the invoice.

Update Receivables Aging Summaries

Competitive businesses, particularly in the import and export, manufacturing and retail sectors, use accounts receivable aging summaries. This document simply records each unpaid invoice and unused credit memo per client. It’s a nifty tool to track overdue payments but only if you regularly update it.

The ideal practice for updating receivables aging summaries should occur after payment has been made, although monthly updates to the report are acceptable too. The overdue ratio, which is the overdue amount divided by the total amount of receivables, should be between 0% and 5%.

Set a Limit for Buyers

Business owners should ask for their clients’ audited financial statements whenever possible. You can determine a credit limit based on the status of their cash flow, hence minimizing the risk of default due to delinquent or unpaid invoices. Late payment fees are possible as well, but you should explicitly inform buyers about additional charges in your invoice. A signed agreement before providing services or supplying products remains a good precaution.

Get Trade Credit Insurance Coverage

Insurance may be the best thing to cover your losses from unpaid invoices. Never discuss the terms of your policy to your buyers, whether or not they are curious about acquiring insurance for their own business. How long should you wait before filing a claim? Depending on your insurance policy, it can range from thirty to sixty days of non-payment after the due date seems an acceptable period to list the invoice as a loss.

Remember that you should have exercised every legally possible way to collect payment before contacting your insurer. Register on Vesl’s platform to know more about how business owners find the right insurance provider for them.

Conclusion

Unpaid invoices will continue to be a part of doing business with buyers, but this reality shouldn’t stop you from reducing your risk exposure. Credit checks on potential clients can complement these five management tools to avoid dealing with delinquent customers. Contact us today to find out more about our platform.

Posted in Risk Management Tagged , , , , , , , ,

Top 4 High-Profile Corporate Insolvencies in the PH

There’s an unnecessary sense of confidence that big companies are unlikely to become insolvent. Historical accounts serve as the best examples. Here are four of the high-profile corporate insolvencies in the Philippines.

by Randolf Santos

Corporate insolvencies still elicit discomfort among Filipino businessmen, especially for those who suffered significant losses from their investments. An insolvent business simply means that investors somehow feel that it’s their fault for being unprepared, and nobody likes to admit that they failed to foresee the unexpected.

Business owners should acknowledge that while insolvencies remain taboo in the corporate world, it can happen to any kind of company. There’s an unnecessary sense of confidence that big companies are unlikely to become insolvent. Historical accounts serve as the best examples. Here are four of the high-profile corporate insolvencies in the country:

ASB Group of Companies

The group of energy and petrochemical companies filed a petition for rehabilitation with the Securities and Exchange Commission (SEC) in May 2000. The SEC Hearing Panel granted a 60-day suspension of payments shortly after ASB Group filed the petition, due to the inability of paying their obligations within one year. This allowed the company to become technically insolvent and qualified for rehabilitation based on SEC rules.

ASB Group had P5.38 billion of assets at the end of 1999. They owed approximately P8 billion to five major banks and 700 unsecured creditors comprising contractors, individuals and suppliers in the Philippines. The SEC approved the company’s rehabilitation plan in 2001. Part of its plans to reduce debt involves the sale of their ongoing projects, payment in kind transactions and real estate divestments.

Uniwide Group

Uniwide became a household name in the late 1980s until the 1990s with their competitive prices for consumer goods. Sari-sari store owners flocked to their shopping malls for this reason. In fact, the company even had to curb foot traffic at their establishments during the peak shopping season in 1988.

The company’s troubles apparently began in 1998 with a poorly managed rehabilitation plan that ultimately led to liquidation several years later. The SEC already described the company as insolvent since 2003. Cash flow seemed to be the initial problem of Uniwide during the late 90s, as suppliers had decided to stop transactions with the company because of non-payment for previously delivered goods.

The situation became worse when creditors began to chase after the retailer. By 2013, the SEC issued a liquidation order after Uniwide’s liabilities exceeded its assets. It also didn’t help that the group already lost its market share to emerging competitors like SM. A court order in 2017 for liquidating Uniwide’s assets seemed like the proverbial nail in the coffin.

Victorias Milling

The company is the biggest sugar manufacturer in the Philippines, but the Asian financial crisis in the late 90s proved to be a bigger force. Victorias Milling sought debt relief in the midst of bankruptcy in 1995. Its dire financial situation can be attributed to the cheaply priced imported sugar, unmaximized production capacity, debt for expansion and repairs.

By 2013, the company bounced back after establishing a creditor-driven program to settle P4.4 billion of restructured debt and redeem issued convertible bonds. Victorias Milling agreed to a 10-year debt settlement in December 2018 to avoid further lawsuits from creditors, who were particularly after the company for roughly P1.2 billion of outstanding loan balances.

Hanjin Heavy Industries Corp-Philippines

Hanjin’s troubles started in 2009 when it lost US$1.1 billion from the global financial crisis, which also incurred US$15 billion of losses to the container shipping industry. In 2010, the Eurozone crisis affected the South Korean company’s trading activity between Asia and Europe. The regional business accounted for almost a quarter of its revenue in the same year. By April 2016, the Korea Development Bank took management control of Hanjin that signaled the severity of the company’s problems.

The embattled shipping company filed for receivership in August 2016 in South Korea, but its impact reached the Philippines due to five local banks that collectively lent US$412 million to the company. The company’s suppliers, however, filed for P48 billion (around US$923 million) of claims in February 2019.

Conclusion

Banks represent the major creditors of these companies that are insolvent or once filed for bankruptcy. If they struggle to collect payments, then it’s hard to imagine the plight of individual creditors and smaller businesses from recovering their losses due to unpaid invoices.

We emphasized the importance of credit management tools in another article, including trade credit insurance. It protects a company’s receivables from non-payment caused by insolvencies or bankruptcies. Vesl is an online platform that gives access to “pay per invoice” trade credit insurance for businesses. 

References

Posted in Risk Management Tagged , , , , , , , ,

Non-Paying Clients Cause 1 Out of 10 Invoices to Be Delinquent

Trade credit insurance protects small and mid-size businesses in the Philippines against the risk of loan default, which can happen due to delinquent invoices.

by Randolf Santos

Has your business attracted more clients over the last 12 months? While this brings an increase in profit, your risk exposure to unpaid invoices grows at the same time.

Small and mid-sized enterprises (SMEs) in the Philippines often overlook the importance of trade credit insurance to cover unpaid invoices from their clients or end buyers. Some business owners believe that revolving credit lines and bride financing loans already protect them from delinquent receivables. However, most of them fail to analyze the probability of defaulting on their debts because of non-paying customers.

Do You Have Too Many Pending Invoices?

On average, receivables comprise over 40% of SME assets, according to Benel Lagua, Development Bank of the Philippines executive vice-president. Out of these receivables, Lagua claims that one out of 10 usually becomes delinquent. This means that if you trade at 10% margin you have to sell 10 times more the value of your delinquent invoice just to make up for the loss.

Aside from non-payment, you have to think of the possibility of delayed liquidation of receivables which is also detrimental to your business. If you financed your invoice, your lender may have already imposed late payment fees for your inability to settle your short-term debt on time.

With these risks in mind, it is important to find ways to secure your receivables. These include selling your invoice via factoring entities, creating a liquid account solely for bad debt reserves, and trade credit insurance.

What Are the Benefits?

Trade credit insurance coverage for businesses guarantees payment of up to 90% of delinquent invoices. Your receivables become delinquent or unpaid when your clients file for bankruptcy or insolvency.It also protects you against protracted default or delayed payment, which manifests when a client can’t settle their financial obligations within six months from the original payment due date. These commercial risks are especially high when there is global recession or even industry developments that certain firms cannot adopt to

Aside from commercial risk, trade credit insured businesses also reduce their exposure to political risks that are beyond their clients’ control, such as terrorism or war, hence affecting their capacity to pay on time.

You can choose between export credit insurance and domestic credit insurance. The latter refers to coverage for businesses that only cater to buyers in the Philippines. Companies with overseas buyers and clients should consider adding export credit coverage to their insurance policies.

Which Companies Need Insurance?

Businesses in the construction, exporting, manufacturing and trading industries usually offer payment terms to their clients, and will therefore benefit from protection against buyer payment default. This does not only apply to local buyers, but especially to foreign ones. In fact, the effect of a payment default from a foreign client may be larger, given the difficulty of collecting payments offshore.

In the U.K., government data showed that several companies already declared insolvency in the second quarter of 2019, due to the growing political and commercial uncertainty from Brexit. With a 12% increase in the same period, the level of insolvencies has reached the highest since 2014.

SMEs in the Philippines should also look out for signs of growing political tension because of the U.S. and China trade war, and the Hong Kong recession, largely because of ongoing protest movements in the autonomous region.

How Much Does Insurance Cost?

Trade credit insurance in the country remains largely unused, especially by small businesses, despite a continually changing financial system. Luckily for SMEs, it’s now easier to find a trade credit insurer through online platforms. One of these, financial technology companies,Vesl, gives SMEs access to trade credit insurance paid on a per invoice basis, making it practical and affordable.

The actual cost of insurance depends on your buyer’s risk, with additional fees to have your buyers assessed. You can register on Vesl’s platform for free to start the process.

Conclusion

Trade credit insurance coverage may not recover 100% of your unpaid invoices, as it is a mitigation tool to recover some loss rather than losing everything. Insurance coverage not only prevents you from experiencing a slimmer profit margin. It also ensures that your creditworthiness for small business loans doesn’t take a negative hit. If you constantly engage in net 30, 60 or 90 payment terms, your risk exposure to defaulting buyers remains high even when you successfully expanded your customer base over the past year.

References:

Posted in Risk Management Tagged , , , , , , ,

Is Your Buyer Asking for Better Payment Terms?

Here are 5 Things you MUST know about your buyers before you do that.

Firstly, what are payment terms?

These are the terms that you, as seller, set to communicate to your clients when you would be expecting their payment. These terms are usually found on the contract and on the invoices relating to that contract.

Common invoice payment terms:

CODCash on Delivery
PIA/CIAPayment in Advance/Cash in Advance
Net 7Payment after seven days of invoice date
Net 10Payment after ten days of invoice date
Net 30 Payment after thirty days of invoice date
Net 60 Payment after sixty days of invoice date
Net 90 Payment after ninety days of invoice date
EOMEnd of Month
Letter of Credit A documentary credit confirmed by a bank, often used for export

Providing better payment terms is a sign of having good faith to your buyer. It’s actually sometimes called giving credit terms because essentially, you’re providing credit to your buyers – to pay later. You’ll find that sellers who do this tend to be aggressive in closing deals. Giving better payment terms is good if you are poising your business to grow.

So, if a new buyer asks for better terms, before jumping in to say yes (or no) right away, you need to first conduct proper buyer due diligence. You can do this by purchasing a credit report from a credit reporting agency or you can do it yourself.

Here’s how you do it yourself – the least you can do

5 things you should ask for from your buyer before giving payment terms.

1. Basic info: Name, address
2. Legal status: Date of establishment, identification number
3. Business activity description: distributor, wholesaler, etc.
4. Trade references: commercial morality (are they involved in any past litigations?), payment history, and agency credit scores if available
5. Financial condition: past and current financial records

There’s nothing wrong erring on the safe side.

Chances are, when you’re applying for trade credit insurance or trade financing for your transactions, the information above would be the same data insurers and lenders would ask about your buyer. Availability of these data can smoothen your applications too.

Disclaimer: The views and opinions expressed by the author does not necessarily reflect the official policy or position of Vesl Pte Ltd. Should you wish to contact the author of the blog, you may do so by contacting her here.

Posted in Risk Management Tagged , , , , , , ,
Open chat
1
Hi! How can we help you? For more information, you can visit our Support page.
Powered by